Sunday, June 8, 2008

Part 4: Oil and gas investments vs. real estate investments

Fourth article in a series on comparing oil and gas investments to real estate investments:
This is the fourth in a series of articles based on my own experiences with investments in oil and gas verses real estate. You can read the first article here.

Comparing tax advantages/issues:
For real estate investments, usually only expenses and losses are deductible during each year the property is owned. When purchasing a property, expenses generally total 5 to 10% of the price.

For well executed real estate purchases, income from the property (and/or potential future capital gain) will more than cover these expenses. If not, then the losses are deductible, but the owner must carry these losses until the property becomes profitable or is passed to another party. Sophisticated real estate investors have developed other tax advantages. This article refers to the average real estate investor/investment.

One other tax advantage for real estate is the ability to depreciate the property (building/structure) over time, usually about 27 years. The land is not depreciated in most cases. The assumption is that the government says the building will only last that long at which time it will have a value of zero dollars. In reality, buildings usually last much longer than this. In locations where land is very valuable, the depreciation is against a small portion of the overall property value.

For direct participation in domestic oil and gas drilling ventures, you can write off the full amount of invested funds against all income types (active, passive, portfolio, capital gains, etc.). The intangible drilling costs (IDC) of a well can be written off immediately in the first year of the investment and can range between 70-90% of the invested funds. The remaining portion of the investment covers tangible costs and is written off over seven years. A past article covers this in more detail.

Other advantages of these oil and gas ventures are:

  • First 15 to 23% of yearly income is tax free due to a depletion allowance. This acts much in the same way as depreciation of buildings does for real estate. The Depletion allowance assumes the well will be dry after 7 years like real estate assumes a building is worthless after 27 years (see related article).

  • Income from a domestic oil or gas well will not count toward alternative minimum tax (AMT) income like it will for real estate (see related article). Income from property may put you into a AMT situation.

  • You can reduce up to 40% of your AMT dollar per each invested dollar invested in a domestic oil/gas drilling investment (see same past article as previous bullet above). In general, real estate does not provide this benefit.

  • You can reduce and possibly eventually eliminate capital gains taxes on 1031 exchanged assets by selling them outside of a 1031 exchange and investing the proceeds in domestic oil and gas drilling investments. Use the high first year intangible drilling cost write-off (70-90%) to eliminate taxes on that portion. Use the seven year write-off tangible costs to eliminate taxes on the remaining portion (the other 30 -10%) (see related article). Most real estate require paying taxes when selling outside of a 1031 exchange.

Next article in the series:
The next article will continue these comparisons between oil/gas investments and investments in real estate.

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Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. Feel free to email us at with any questions, thoughts, or requests for information on what projects we are invested in.

This article was posted at Accredited Investor Blog: Past articles can easily be found at This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision. Sphere: Related Content

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